Corporate Imagination and Expeditionary Marketing

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The global competitive battles of the 1980s were won by companies that could achieve cost and quality advantages in existing, well-defined markets. In the 1990s, these battles will be won by companies that can build and dominate fundamentally new markets. Speech-activated appliances, artificial bones, micro-robots, cars that park themselves—products like these not only make the inconceivable conceivable but also create new and largely uncontested competitive space. Over the next decade, more and more companies that have not already done so will close the gap with their rivals—mostly Japanese—on cost, quality, and cycle time. But without the capacity to stake out new competitive space, many will find themselves interned in traditional, and shrinking, product markets.

Early and consistent investment in what we have called core competencies is one prerequisite for creating new markets.1 Corporate imagination and expeditionary marketing are the keys that unlock these new markets. A company that underinvests in its core competencies, or inadvertently surrenders them through alliances and outsourcing, robs its own future. But to realize the potential that core competencies create, a company must also have the imagination to envision markets that do not yet exist and the ability to stake them out ahead of the competition.

A company will strive to create new competitive space only if it possesses an opportunity horizon that stretches far beyond the boundaries of its current businesses. This horizon identifies, in broad terms, the market territory senior management hopes to stake out over the next decade, a terrain that is unlikely to be captured in anything as precise as a business plan. The early enthusiasm that several Japanese companies brought to developing high definition television grew out of just such a vision. Careful and creative consideration of the many new opportunities that might emerge if HDTV could be made a reality led them beyond the traditional boundaries of the color television business to identify potential markets in cinema production, video photography, video magazines, electronic museums, product demonstrations, and training simulations, among others.

As this example demonstrates, a company’s opportunity horizon represents its collective imagination of the ways in which an important new benefit might be harnessed to create new competitive space or reshape existing space. Commitment to an opportunity horizon does not rest on ROI calculations but on an almost visceral sense of the benefit that customers will ultimately derive should pioneering efforts prove successful—a deeply held belief that “with all this benefit about, there must be a market in there somewhere.” The more fundamental the envisioned benefits and the more widely shared the enthusiasm for the opportunity horizon, the greater the company’s perseverance will be.

Sony persevered in its 13-year effort to commercialize charge coupled devices (CCDs) because it refused to view the tiny, high-resolution, image-sensing chips in solely technological terms. Instead, CCDs were seen internally as “electronic film,” with the potential to provide much the same range of benefits as traditional chemical-based film and to open markets that Kodak and other companies had served in the past. A similar “benefits view” of an emerging core competence (the pocketability of radios and other consumer electronic products) prompted the company’s enthusiastic embrace of transistor technology two decades earlier. Sharp’s commitment to mastering flat-screen display technology is likewise based on a belief that high-resolution, thin, energy-efficient video screens will provide a wide range of benefits to customers through many different product applications.

In Japan, the task of creating new markets dominates senior managers’ agendas, partly, perhaps, because their domestic rivalry is so intense. New competitive space does not stay new for long. Building one new business after another, faster than competitors, is the only way to stay ahead. The fruits of this obsession are visible. Think of Yamaha’s strong position in electronic pianos, synthesizers, and other digitally based musical equipment, Sharp’s strengths in pocket LCD televisions and ultrathin displays, or Toshiba’s leadership in laptop computers.

Conventional wisdom says it is almost impossible for big companies to be truly innovative. New businesses that wriggle out from under the deadweight of bureaucracy and short-term thinking exist despite the system not because of it. Yet no one believes that big companies’ employees are any less imaginative than their peers in smaller companies. So to protect imaginative individuals from corporate orthodoxies, senior managers in many companies tend to isolate them in new venture divisions, skunkworks, incubators, and the like.

The goal of such programs is to create a greenhouse in which 1,000 flowers can bloom. But the greenhouse seldom has more than six inches of headroom, partly because of a lack of corporate conviction about the opportunities being pursued and partly because the venture managers cannot tap the company’s resources worldwide. Trying to leverage corporate competencies into new businesses while at the same time protecting new ventures from corporate orthodoxies is a contradiction in terms. Rather than move new business development off-line, the challenge of creating new markets must be met head-on. Individual imagination must become corporate imagination.

New markets are seldom created by some mysterious process of spontaneous generation. Bolts-out-of-the-blue will always be an important part of the creative process. But more important, we believe, is the logical process through which companies can unleash corporate imagination, identify and explore new competitive space, and consolidate control over emerging market opportunities.

The Imaginative Company

At some point in almost every big company’s development, most of management’s time and effort shifts from exploiting new opportunities to protecting existing businesses. In such a climate, the first question the sponsor of any new opportunity hears is, “How will this affect the current revenue stream?” The concern is valid, but it can stifle corporate imagination. If every new opportunity is seen only through the lens of existing businesses, most will be stillborn.

Think about the ambivalence with which Xerox addressed the small copier business in the 1970s and early 1980s. Small copiers were sold through dealers rather than a direct sales force. Profits depended on the number of units sold, not on margins. High reliability threatened service revenues. Consumables like paper and toner were seldom sold on a package basis. The new business eroded the pillars of Xerox’s traditional profitability in almost every respect. Under such circumstances, it is all too easy for managers to develop a defensive attitude, to focus even more intently on protecting the “core” businesses, and to surrender new, potentially more attractive opportunities with hardly a fight.

Four elements combine to quicken a company’s corporate imagination: escaping the tyranny of served markets; searching for innovative product concepts; overturning traditional assumptions about price/performance relationships; and leading customers rather than simply following them.

Escaping the Tyranny of the Served Market. If a company’s strategic business units are hampered by overly narrow business charters, the search for unconventional market opportunities will be cut short. Conceiving of a company as a portfolio of core competencies rather than as a portfolio of products is one way to extend the opportunity horizon dramatically. Motorola sees itself as a leader in wireless communications, not just as a producer of paging devices and mobile phones. As a consequence, the company’s charter permits it to explore markets as diverse as wireless local area computer networks and global positioning satellite receivers. Ajinomoto, a giant grocery-products company, is not only in the food business: it also applies the skills it has mastered in fermentation technology to produce an elastic paper for Sony’s top-end headphones.

If managers are unable to think outside current business boundaries, they will miss opportunities that depend on the combination of skills from several divisions. Thus another way to fire corporate imagination is to get managers to explore the white spaces that lie between existing business units. Most companies work very hard to delineate the executive ownership of existing competitive space. But how many give equal attention to assigning the responsibility for finding and then filling in the white spaces that represent new competitive territory?

Kodak recently extended its opportunity horizon substantially by searching explicitly for markets that fell between or, more accurately, across its traditional areas of competence in chemicals (film) and electronic imaging (copiers). One of the product opportunities that emerged from this cross-divisional exercise was what insiders are calling the “electronic shoebox.” Recognizing that in many homes, family photographs sit in a shoebox, gathering dust in the attic, Kodak’s chemical and electronic engineers dreamed of a medium that would let customers store their photographs easily and safely, view them on a standard television, and rearrange them at the touch of a button. The result was a process, available through photo developers, that turns chemical images on photographic film into electronic images that can be viewed and edited on a videodisc player connected to a television. While it is too early to say whether this product will be a great success, it has already shown Kodak how a synthesis of skills residing in seemingly disparate businesses can stretch its opportunity horizon.

Searching for Innovative Product Concepts. New competitive space is created when a dramatic innovation in a product concept reshapes market and industry boundaries. Such innovations take one of three forms: (1) adding an important new function to a well-known product (Yamaha’s digital recording piano or Toto’s “intelligent” toilet, which uses biosensors and microprocessors to provide medical diagnostic data); (2) developing a novel form in which to deliver a well-known functionality (automated teller machines or Sharp’s “Electronic Organizer” pocket calendar); and (3) delivering a new functionality through an entirely new product concept (camcorders and home fax machines).

Standard approaches to market analysis are not likely to lead to innovations like these. They are created when people substitute a matrix of needs and functionalities for the more conventional matrix of customers and products. This is a new, reconfigured view of the market. To illustrate, imagine a long line of impatient staff waiting to use a large copier in the subbasement of a corporate tower. A conventional market analysis would look at the queue as a customer-product problem. Viewed that way, the solution is an even faster, even larger copier—in other words, an extension of the existing product.

Now look at the same long line in terms of needs and functionalities. The copier’s functionalities include both speed and accessibility. And if most of the people in the line are making only a few copies of short documents, they may value accessibility over speed. If so, the solution would be an entirely new product, a smaller, slower copier in the office or at home that would minimize the total time each user had to spend getting a copy. Disaggregating a product or service into its functional components is a logical process. Discovering and developing a new product that appropriately reconfigures functionalities to satisfy a previously unmet need is an act of corporate creativity.

Conceiving of markets in terms of needs and functionalities may look straightforward, but we find such thinking in only a few companies. Even fewer seem to have the imagination to translate this understanding into fundamentally new product concepts. Asking “innocent” questions (why does the product have to be this way?), understanding what the current product concept doesn’t do for customers, and imagining how functionalities could be unbundled and rebundled are just some of the means through which managers can escape the orthodoxy of conventional product concepts.

Overturning traditional price/performance assumptions. Managers and product designers typically think about price and performance in linear terms, which limits the potential for radical innovation. Overturning this assumption often reveals undiscovered competitive space. For example, when Sony and JVC engineers were exposed to Ampex’s $50,000 video tape recorders in the late 1950s and early 1960s, they envisaged a market where the same functionality could be delivered with a $500 price tag. Fidelity Investments unlocked a vast new market for financial services when it challenged the assumption that sophisticated investment vehicles could be made economic for only the wealthiest investors. Sony recently introduced a video sketch pad that a child can use to draw vividly colored pictures on a television screen. In many ways, the product mimics the computer graphics capabilities of much more expensive computerized workstations. But it is made expressly for youngsters and is modestly priced. You can almost hear parents asking, “What will they think of next?”

Companies that refuse to challenge existing price/ performance trade-offs usually assume that an existing product concept is the only jumping-off point for new product development efforts. Yet some of Sony’s most successful products were once labeled unattainable dreams. In pursuing these dreams, Sony managed to overturn existing product concepts by giving its engineers and designers both the freedom to imagine and the technology necessary to make what they imagined real.

As this suggests, understanding how emerging technologies might allow customers’ unmet needs to be satisfied or their existing needs to be better satisfied is crucial to discovering new competitive space. Yamaha started out making traditional pianos. But its managers and engineers transformed the industry: first, by distinguishing the piano’s functionality (the musical keyboard) from its traditional form (uprights and baby grands); and second, by understanding how it could apply a new technology (digital-sound encoding) to satisfy customers in new and unexpected ways. Yamaha’s engineers used the new technology both to enhance the piano’s existing functions—it could be kept in tune, put in a much smaller space, and used with headphones (to the relief of neighbors)—and to imbue it with entirely new functions, such as giving a one-finger virtuoso the accompaniment of a big band. In contrast, few of Yamaha’s competitors understood the threat the new technology posed to their business, nor were they able to separate the piano’s function from its traditional product form and construction process.

Getting Out in Front of Customers. Yamaha’s experience illustrates another important point: when the goal is truly innovative products and markets, simply being customer-led is not enough. Go back a decade or two. How many of us were asking for microwave ovens, cellular telephones, compact disc players, home fax machines, or electronic white-boards? Of course it is important to listen to customers, but it is hard to be a market leader if you do no more than that.

One Detroit automaker recently introduced a new compact car. The company conducted extensive market research when it began its product development efforts in the late 1980s. Four years later, it introduced the perfect car to compete with its Japanese competitors’ three-year-old models. The company was following its customers all right. But its customers were following more imaginative competitors. Honda recently introduced its NSX sports car—a car with the manners of a family sedan and the performance of a Ferrari. The NSX was not a car buyer’s dream. No car buyer could have dreamt of such a car. Instead, says Honda, the NSX was a carmaker’s dream and represents the fulfillment of the company’s longstanding ambition to produce a car that is both exotic and domestic. It is interesting to ask, “Who is Honda going to benchmark now?” The answer may well be that Honda is more intent on outpacing competitors than benchmarking them.

We believe there are three kinds of companies: those that simply ask customers what they want and end up as perpetual followers; those that succeed—for a time—in pushing customers in directions they do not want to go; and those that lead customers where they want to go before customers know it themselves. Today NEC dreams of (and pursues) a telephone that can interpret between callers speaking in different languages. Motorola envisions a world where telephone numbers are attached to people rather than places and where a personal communicator allows millions of out-of-touch business travelers to be reached anytime, anywhere. Market research and segmentation analyses are unlikely to reveal such opportunities. Deep insight into the needs, lifestyles, and aspirations of today’s and tomorrow’s customers will.

There are many ways such insights may be garnered, all of which go beyond traditional modes of market research. Toshiba has a Lifestyle Research Institute and Sony explores “human science” as passionately as it pursues the leading edge of audiovisual technology. Yamaha gains insights into unarticulated needs and potentionally new functionalities through a “listening post” it established some years ago in London. Stocked with leading-edge electronic hardware, the facility offers some of Europe’s most talented musicians a chance to experiment with the future of music making. The feedback helps Yamaha continually extend the boundaries of the competitive space it has staked out in the music business.

Yamaha’s approach illustrates a basic point: to gain the most profound insights, a company must observe up-close the world’s most sophisticated and demanding customers.

Toyota has adapted powerful computerized design tools normally used by automotive designers to allow potential buyers to design their dream cars on a video screen. In the process, Toyota gains insights into product possibilities perhaps undreamt of by its own design staff. Mazda has created a subsidiary company, under the control of its senior managing director for R&D, that will provide a facility and forum for customers to share their ideas directly with the senior design staff. The insights Mazda gains will help it create new product concepts aimed at specific lifestyle segments.

Companies that succeed in educating customers to what is possible develop both marketers with technological imagination and technologists with marketing imagination. In many companies, marketers seem to be winning the long-running debate over whether new product development should be technology-driven or market-led. Technologists are accused of being out of touch with the marketplace, more interested in technical wizardry than in understanding customers. Much of this criticism is valid. Though scientists and engineers often claim that “the market wasn’t ready,” the truth, more often than not, is that the technical community either did not understand the customers’ underlying needs or missed the appropriate price/performance target. Yet it is paradoxical that as many companies are striving to be more market-oriented, their world-class competitors are increasingly using advanced technology to create new businesses that few marketers could have imagined.

Neither technology nor marketing can be the sole departure point for creating new competitive space. Multidisciplinary product teams and “better communication” between sales and development are useful but not sufficient. While many companies have procedures that allow the sales organization to relay customer requirements to technical personnel, few have procedures that work in reverse—to inform those closest to the customers about emerging technological possibilities.

In one Japanese company, senior technical officers spend as many as 30 days a year outside Japan talking to customers. The goal is not to solve technical problems nor to close a sale but to observe customers and absorb their thinking. In another Japanese company, the chief engineer of a major new business development program lived for a time with an American family thought to be representative of the customers his company hoped to win. And in yet another, a senior technical manager with a Ph.D. in physics from an American university (who eventually went on to head corporate R&D) spent several years running an important sales subsidiary in the United States. In every case, the objective was not to improve the flow of information between marketers and engineers, nor to manage the balance of power between the two groups, but rather to blur organizational and career boundaries by ensuring that both communities had a large base of shared experiences. The result was a potent mixture of market and technical imagination.

Expeditionary Marketing

Creating markets ahead of competitors is a risky business. Sometimes the hoped-for market does not exist. Almost always it emerges more slowly than anticipated. Companies that create markets ahead of their rivals do not have perfect perspicuity. They have found ways to minimize the risks of staking out virgin territory through the process we call expeditionary marketing. The goal of expeditionary marketing is to determine the precise direction in which to aim (that is, the particular configuration of product functionalities that the customer really values) and the distance to the target (the technical and other hurdles that must be overcome to achieve the combination of price and performance that will open up the new competitive space).

A product or service is a hit when it combines just the right blend of functionality, price, and performance to penetrate its target market quickly and deeply. In new business development, there are two ways to increase the number of hits. One is to try to improve the odds on each individual bet, or what we call the hit rate. The other is to place many small bets in quick succession and hope that one will hit the jackpot.

Most companies have a plethora of policies aimed at increasing their hit rate: thorough market research, careful analysis of market segments, competitor benchmarking, industry structure analysis. But market research carried out around a new product concept is notoriously inaccurate. Among other problems, it understates the opportunity about as often as it overstates it—and often by a wide margin. In either case the results can be fatal. If the opportunity is seriously understated, the pioneer leaves itself open to a second strike by a competitor. Conversely, overoptimism can create such a gap between expectations and reality that the company prematurely abandons the opportunity.

One way to minimize the risk of creating new markets is to let others go first and learn from their mistakes. But what if your competitors very seldom make fatal mistakes and quickly recover from the smaller errors they do make? If the pioneer is a small, essentially national company, it may still be possible to deliver a decisive second strike. But if the pioneer is a well-managed, global company, there may be little chance to recover.

In the past, large European and U.S. companies could often afford to be fast followers thanks to their worldwide distribution systems and brand presence, while Japanese companies succeeded on the basis of superior cost and quality. But as Japanese competitors build up their own global infrastructure and Western competitors race to catch up on cost and quality, the maneuvering room for a follower is getting tighter and tighter.

Patience isn’t the only way to lessen the risk of a new market entry. If the goal is to accumulate understanding as quickly as possible, a series of low-cost, fast-paced market incursions—expeditionary marketing—can bring the target more rapidly into view.

Staking out uncharted territory is a process of successive approximations. Think about an archer shooting arrows into the mist. The arrow flies at a distant and indistinct target, and a shout comes back, “right of the target” or “a bit to the left.” More arrows are loosed and more advice comes back until the cry is “bull’s-eye!” What counts most is not being right the first time but the pace at which the arrows fly. How fast can a company gather insights into the particular configuration of features, price, and performance that will unlock the market, and how quickly can it recalibrate its product offering? Little is learned in the laboratory or in product-development committee meetings. True learning begins only when a product—imperfect as it may be—is launched.

JVC’s success and Sony’s near-success in opening the consumer market for VCRs in the late 1970s came on the back of a whole string of product launches (many of them less than outstanding successes) over more than a decade. For example, Sony introduced a reel-to-reel video tape player aimed at the consumer market as early as 1965. And its U-Matic VCR, launched in 1971, was also intended for the consumer market. (Priced too high, it found a niche with professional users.) Matsushita, JVC’s parent, likewise made several attempts to crack open a consumer market for video tape players before finally blanketing the world with its VHS standard.

In contrast, RCA experimented with a broad range of alternate video technologies and probably spent more time and money on development than many of its competitors did. But it did not put a product on the market until 1981—and then it was a videodisc that could play back but not record. In many respects, the product was a technical success, but the isolation of RCA’s engineers from market trends and competitors’ product innovations meant that a critical lesson went unlearned: consumers wanted the freedom to record programs and watch them at their leisure or, as a manager at JVC put it, “to escape the control of the broadcasters.”

Expeditionary marketing increases the number of hits a company achieves not by raising its hit rate but by increasing the number of market opportunities, niches, and product permutations it explores and thus the rate at which it accumulates market knowledge. To use a baseball analogy, the objective is not to raise the player’s batting average but to get more times at bat. Companies with very high hit rates can boast (legitimately) about their batting averages. But if those averages are the product of a cautious, go-slow approach to creating new markets, the company will be less successful overall than scrappier rivals with lower averages but more times at bat. The number of hits achieved is, of course, determined by the hit rate multiplied by the number of times at bat.

The practical problem expeditionary marketing presents is how to maximize the capacity for frequent low-risk market incursions. In the first instance, the solution depends on minimizing the time and cost of product iteration.

Speed of iteration refers to the time it takes a company to develop and launch a product, accumulate insights from the marketplace, and then recalibrate and relaunch. Other things being equal, a company with a 12-month iteration cycle will be able to close in on a potential market faster than one with a 36-month cycle. Each product iteration unfreezes one or more aspects of the product design and thus provides an opportunity for a company to apply what has been learned from the marketplace and improve the product for another incursion. Consumers may consider a company an also-ran if its product development cycle is longer than the product life cycle established by a competitor. Toshiba’s competitors in the laptop computer business face this risk now.

Toshiba’s blistering pace of product introduction allowed it to explore almost every possible market niche and to outrun rivals like Grid, Zenith, and Compaq. (See the table, “Toshiba Explores Every Corner of the Laptop Market.”) Moreover, if one particular model failed, its withdrawal would hardly cause a ripple in customer confidence. In fact, by 1991 Toshiba had discontinued more laptop models than some of its flat-footed competitors had launched.

Toshiba Explores Every Corner of the Laptop Market

In pursuing expeditionary marketing, cost is just as crucial as speed. If every arrow is gold-plated, management will be unwilling to shoot many into the mist. Consider the way Japanese carmakers are exploring every possible market niche, from exquisite luxury automobiles to cars that seem to be little more than shopping carts with engines. Nissan is targeting young female buyers with a retro-styled car that will initially be produced in a run of only 20,000 units. Dramatically lower product development and plant-tooling costs are critical to this breadth of experimentation.

Think of the dilemma for a manufacturer whose cost per product iteration is three to four times that of competitors. What will management’s attitude toward new product development be? Simply, the company will not be able to afford the risks of market leadership. Consumers will come to regard the company as conservative and slow-moving. It may hold on to some of its loyal, aging customers, but it will almost certainly lose the excitement sweepstakes among new buyers. Inevitably, the mantle of leadership will fall on the shoulders of companies that are expanding the limits of customers’ expectations.

In recent years, Sony, Matsushita, Nissan, and Toshiba have all had a large number of hits. Is this because they have more reliable market research, a more vigorous phase-review process, or a go-slow approach to new product development? No. They’ve simply been at bat more often. And if we assume that they do not have an inherently lower hit rate than their Western counterparts—but do have a higher rate of market experimentation and learning—then sooner or later they seem destined to take control of emerging market opportunities. (In fact, companies with a capacity for fast-paced market incursions may see both their hit rates and their hits go up over time.)

In addition to helping a company close in quickly on individual market targets, rapid experimentation also allows it to accumulate insights into the needs and desires of a particular set of consumers. Sony has accumulated a wealth of lifestyle knowledge about young consumers through the rapid pace and broad scope of its market experimentation. Now Sony is delving into the minds of a new generation of customers by aiming its line of “My First Sony” products at preschoolers. If there is a learning curve about lifestyles and markets, Sony is a long way down it. In the future, we can expect Sony’s hit rate to go up—not because it devised better market research methodologies, but because it has gained deep insight into the habits, aspirations, and values of the world’s young, fashion-conscious buyers.

What can be done to increase the speed and reduce the cost of market experimentation? Simultaneous development, where technologists, manufacturing engineers, and marketers work as a single team rather than in relay is one important contribution. But there are other strategies as well. Borrowing resources is one way to pare cost and time from new business development. In many cases, Japanese companies have conserved their resources by letting Western partners take on the initial expense and risk of investment in distribution and marketing. By concentrating on upstream product development and learning from their multiple partners, these companies have been able to improve products rapidly, hone-in on market opportunities, and establish absolute product leadership quickly. That was the division of labor between JVC and its European partners in the VCR business, between Fujitsu and ICL in the computer business, and between Mitsubishi and Chrysler in the car business.

Creatively reusing off-the-shelf technologies is another way of getting to market quickly and at low cost. Canon uses a version of the toner cartridge it developed for its personal copiers in its laser printer line and its plain-paper fax machines. It is said that no technology is ever abandoned in Japan, it’s just reserved for future use. If migrating a technology from one business to another is one shortcut to market, another is the capacity to fuse distinct competencies from different parts of the company in new, unimagined ways. Mechatronics, biomechanics, optoelectronics, and electrochemistry have given birth to a range of new products that owe more to the marriage of existing technologies than to the discovery of a fundamentally new science. This suggests that the discovery of new competitive space is helped when a company has a class of technology generalists that can easily move between disciplines. Overspecialization is a constraint on corporate imagination and a hindrance to discovering new markets.

It also suggests that yet another way to speed up the pace of new market development is to develop the capability to redeploy human resources quickly from one business or opportunity to another. Sharp’s top management sponsors a program that encourages all its employees to submit ideas for new business opportunities. If the target seems worthwhile, the company forms a project team. These teams are given numbers rather than names to head off divisional disputes. Each team has the right to look worldwide within Sharp for the skills it needs to achieve the project’s objectives. Over the past few years, Sharp has formed close to 150 urgent project teams, resulting in a stream of new product concepts, from the Electronic Organizer to LCD projection televisions.

In fact, almost every major Japanese company we are familiar with has high-level, cross-company project teams whose mission is to leverage the company’s worldwide resources to create new businesses. Such corporate-sponsored new business development poses an interesting alternative to the skunkworks and internal venturing programs that are more familiar in Western companies. While skunkworks typically operate in obscurity, corporate project teams at Sharp, Sony, and other Japanese companies are very high profile. Project team leaders typically have access to the worldwide skill base of the company, whereas Western intrapreneurs often find it difficult to get access to resources outside their business or functional area. This capacity for internal borrowing and cross-pollination is critical. If every new business team has to gear-up on its own, opportunities will be lost to competitors with more fluid internal resources and clearer new business development priorities.

Rethinking the Meaning of Failure

The way in which many large companies define and punish failure is one of the biggest impediments to the discovery of new competitive space. Because most companies are still tied to the old way of measuring the hit rate, they have a perverse way of defining failure. Home runs become the only criterion for success. Anything less is a failure. But if top management insists on a home run every time, few will be brave enough to step up to the plate, and many of the company’s most exciting opportunities will remain unexplored. On the other hand, no one should go to bat expecting to strike out. Expeditionary marketing is not a license to fail; it is a mandate to learn when inevitable setbacks occur.

When a product aimed at a new market goes astray, the first step is to ask a series of questions: Did we learn anything that will improve the accuracy of our next attempt? Did we work hard to minimize the investment risk? Did we have reasonable expectations about the rate at which the market would develop? Can we quickly recalibrate and try again? Does the potential size of the opportunity warrant another try? Failure should be declared only if the answer to all these questions is no. Otherwise, a genuine opportunity may get lost in the embarrassment of a missed attempt.

Unfortunately, verdicts of corporate failure rarely distinguish between arrows aimed at the wrong target and arrows that simply fell short of the right one. And because failure is usually personalized, there is a search for culprits rather than lessons. Even when some salient new fact about the marketplace comes to light, more often than not the manager in charge is blamed for not knowing it well in advance.

Not surprisingly, if the personal price for experimentation is high, managers will retreat to the safety of test-it-to-death, do-only-what-the-customer-asks-for conservatism. But conservatism leads to much grander, though less visible disasters. Managers seeking to avoid obvious failures may let exciting new opportunities slip through their fingers. Failure is typically, and we believe wrongly, measured in terms of dollars lost rather than dollars foregone. In which computer company, for example, has a senior manager lost his or her job, corner office, or title for surrendering leadership in the laptop business to Toshiba? Managers seldom get punished for not trying, but they often get punished for trying and coming up short. For that reason, many managers are more concerned with their hit rate than with the number of hits they generate. But who is more valuable to a team: a .400 hitter who will step up to the plate only when a weak pitcher is on the mound and the wind is blowing out to the bleachers, or a player who hits .250 day in, day out?

Failure is as often the child of unrealistic expectations as it is of managerial incompetence. In the 1980s, General Electric faced a dazzling opportunity: to stake out a leadership position in the market for the factory of the future. Integrating CAD/CAM, computer-integrated manufacturing, robots, and automated material handling was an awesome challenge, and one GE was willing to confront. But unrealistic expectations about how fast the market would develop, combined with an all-or-nothing approach to market entry, set GE up for a spectacular failure and a sizable write-off. Subsequently, GE was able to regroup with more modest, short-term objectives and to find partners with whom to share much of the risk. But GE’s confidence in the business opportunity never fully recovered from this self-inflicted wound. The point is not that GE’s ambitions were too grand, but rather that what constitutes failure depends on management’s initial assumptions. If the opportunity is oversold and the risks undermanaged, failure and premature abandonment of the opportunity are pre-ordained.

Too often commitment to a new opportunity is measured in terms of investment dollars—”if it doesn’t have nine zeros after it we’re not serious”—rather than consistency of effort. Too often staying power is interpreted to mean deep pockets rather than sheer persistence in learning from the market. If a company has not learned to edge its way into new businesses purposefully but prudently, few new markets will ever be entered.

What about the Japanese failures? Where are they? Think back to Toyota’s and Nissan’s early, pathetic attempts to enter the U.S. market. Canon, one of the companies we respect most, failed to capitalize fully on a pioneering role in the calculator business. But although the Japanese failures are many, they are also comparatively small. The lessons they yield are quickly learned, and the recovery time is measured in months, not years.

To stimulate new business creation, we need a new yardstick for managerial performance. Financial theory teaches us to measure financial returns on a risk-and time-adjusted basis. How often do we make such adjustments when measuring managerial performance? Early in the new business development process, the most critical resource is not cash but management talent. New opportunities require a degree of management attention disproportionate to their short-term revenue prospects. If managers are wary of new opportunities or if management talent is allocated on the basis of the present size and profitability of the business, new markets will not be created and the company’s best managers will accumulate in businesses that should run on autopilot. In companies where the best managers shuffle between the safest businesses, the results are status-quo strategies and a dearth of new market development.

Companies need to learn to manage tomorrow’s opportunities as competently as they manage today’s businesses. (See the chart “Stretching the Corporate Imagination.”) If managers spend more time looking at their feet than at the horizon, they will find themselves stumbling along in the footsteps of their competitors. If there is no shared view of the opportunity horizon, there will be no sense of the opportunity costs of failing to escape the gravitational pull of today’s businesses. If customers are given merely what they’ve asked for when competitors are giving them what they haven’t yet dreamed of, leadership will be an ever-receding goal. If commitment is measured in terms of investment rather than persistence, risks will be undermanaged and expectations overinflated. If there is no risk- and time-adjusted view of managerial performance, new opportunities will wither from lack of managerial attention. If failure is seen only as dollars lost, and not as dollars foregone, new business opportunities will be prematurely abandoned.

Stretching the Corporate Imagination

In many companies, refiring the corporate imagination will require profound changes in policy as well as mind-set. Opportunity management must command as much of top management’s time as operations management does. Creating new competitive space is too important to be relegated to those who happen to have time and superfluous resources on their hands. It is top management’s responsibility to inspire the organization with a view of distant shores and then help the intrepid explorers set sail.

C.K. Prahalad was the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan’s Ross School of Business. He wrote this article, his 16th for HBR, before he passed away, on April 16, 2010.